How A Micro-Corporation Can Help You With Loan Payback Programs

A Micro-Corporation Is Best For Loan Payback Programs

Check out the White Coat Investor blog for tips on saving money on your school loan payback. As you read this post, it's important to pay attention to the fact that repayment programs are income-based. Micro-business owners have a little secret: they have the power to manage their income in a way that allows them to lower their W-2 self-employment income while maximizing contributions to tax-deferred retirement accounts and HSA accounts.

By choosing to start your career as a self-employed doctor through your micro-corporation, the net result is that you will have a lower adjusted gross income (AGI), but not necessarily a lower household income. As a result, you will be able to pay much less through your repayment program.

This is yet another reason why every young doctor should consider starting their own micro-corporation during their residency. By entering the marketplace as a micro-business and receiving your earnings as 1099 income instead of traditional employment, you can minimize your AGI and maximize your financial benefits.

Take it away Jim.

What Is Discretionary Income?

October 21, 2023 MST

By Dr. Jim Dahle, WCI Founder

The term “discretionary income” gets thrown around all the time. However, it actually has a legal definition that does matter to many white coat investors, especially if they're still paying off student loans. 

Definition of Discretionary Income

Discretion is defined by Merriam-Webster as individual choice or judgment. So, discretionary income is money that is left over, and you have to decide what to do with it. It is money that is not committed to anything else. It can be used for whatever you like. You can spend it, invest it, or give it away.

More information here:

When Is It OK to Start ‘Enjoying’ Your Money?

Why Discretionary Income Is Great

I'm a big fan of discretionary income. I want your discretionary income to make up as much of your income as possible. Fifty percent, 80%, 90%, or even more. When you have very little of your income dedicated to fixed expenses, you can build wealth quickly. You can direct your money toward that which you value most. Perhaps most importantly, if something happens to your income, you can rapidly cut back on your variable spending and still be OK.

More information here:

Getting Better at the 5 Money Activities

Discretionary Income and Income-Driven Repayment Programs

The federal student loan Income-Driven Repayment (IDR) programs such as

• Income Contingent Repayment (ICR),

• Income Based Repayment (IBR),

• Pay As You Earn (PAYE), and

• Saving on a Valuable Education (SAVE), which used to be known as Revised Pay As You Earn (REPAYE)

All use the concept of “discretionary income” to determine your payments. The formula for discretionary income is really quite simple. According to the federal government, you take your income and subtract out 150% of the “poverty guideline.” In the case of SAVE, that percentage has increased to 225%. The amount left over is your discretionary income.

Your income for these purposes is defined as Adjusted Gross Income (AGI). That's your total income minus a few deductions like self-employed retirement accounts, self-employed health insurance, and HSA contributions.

The poverty guideline is published by the Department of Health and Human Services (HHS). It depends on where you live and on your family size. For 2023, the guidelines for those living in the Lower 48 can be found here.

So, let's calculate the discretionary income for a hypothetical resident. Let's say the resident is single and has an AGI of $60,000 per year. The poverty guideline is $14,580. So….

Discretionary Income = $60,000 – (1.5 × $14,580) = $38,130

This resident's classmate is married with two kids. What is the discretionary income there?

Discretionary Income = $60,000 – (1.5 × $30,000) = $15,000

These residents work with a married attending who has four kids. The attending makes $240,000, and their spouse makes $80,000. After a few deductions, their AGI is $300,000.

Discretionary Income = $300,000 – (1.5 × $40,280) = $239,580

Easy, peasy right? How does this play into the IDR programs? Well, each of the IDR programs requires you to spend a certain percentage of your discretionary income on your student loan payments as follows:

• ICR: 20%

• IBR: 15%

• PAYE: 10%

• SAVE: 10% (5% for undergraduate loans)

For the sake of simplicity, let's assume these three doctors are all enrolled in SAVE. What is their monthly payment?

• Single resident with a discretionary income of $38,130 pays $3,813 per year or $318 per month

• Married resident with a discretionary income of $15,000 pays $1,500 per year or $125 per month

• Attending with a discretionary income of $239,580 pays $23,958 per year or $1,997 per month

Let's take it one step further. Let's assume they all owe $200,000 of student loans at 6% (i.e., $1,000 per month of interest accumulating). The 10-year payment on this debt would be $27,174 per year or $2,264 per month. Thus, NONE of them are going to have this debt paid off in less than 10 years unless they make payments beyond what's required. In fact, that attending would have to pay $3,956 per month to get those loans paid off within the five years I recommend.

The REPAYE system used to offer a subsidy, where half of all unpaid interest was waived. That lowered the effective interest rate. With SAVE, though, no accrued interest will be added to your loan balance if you make your monthly payment. For example: if $500 in interest accumulates each month and you have a $200 payment, the remaining $300 would not be charged.

If you have student loans and will be in an IDR program, it is important to understand how your payments are calculated, what you can do to lower them further, and what you can do to increase your subsidies (under PAYE and IBR, the government will pay your interest for three years). As a general rule, the key to lowering payments and increasing subsidies is to lower your AGI. However, you can also decrease your discretionary income by adding family members (though beware that there are plenty of other costs if you take that route)!

Here are all the things you can do to lower your AGI, lower payments, and increase your subsidies:

1. Get married to a non-earner

2. Have children

3. File a tax return with $0 in income as an MS4

4. Contribute to tax-deferred retirement accounts and HSAs

5. File taxes Married Filing Separately if married to a high earner (this works with PAYE and SAVE)

6. Enroll in or change from ICR, IBR, or PAYE to SAVE

This is Tod, and I believe Jim's summary was marvelous. However, I think he may have overlooked a crucial 7th point that is often hidden from most of you.

The 7th Point From SimpliMD

I would like to suggest adding a 7th point, which is to start a micro-corporation and earn your professional income through this micro-business. This strategy will empower you to effectively lower your AGI (Adjusted Gross Income) without negatively impacting your household income. When you are self-employed, you have the power to determine your "reasonable salary," which directly impacts your AGI (Adjusted Gross Income). By setting a lower salary, your AGI will also be lower. It's important to note that micro-business owners understand that unlike traditionally employed W-2 workers, their salary is just one of the four ways their 1099 earnings contribute to their household cash flow.

Let this last paragraph settle into your mind. It's likely something you were never told during your training, nor is it something the federal government is going to advertise to you. However, this hidden power to lower your AGI can be unlocked through a professional micro-business structure designed specifically for you.

I invite you to reach out to SimpliMD here and let us help you set up your micro-corporation. We offer a significantly reduced price of $4000 for residents and fellows here. This small cost could save you thousands of dollars in your loan repayment program and easily pay for itself.

If you are already attending, we can help you form a highly efficient and personalized professional micro-corporation here-don’t wait to do this—it has the potential to significantly enhance your professional autonomy and improve your financial well-being!

And before you do this, I invite you to first become a SimpliMD member for a small fee, you will gain access to $2500 in savings at SimpliMD, including a $200 off coupon that can be applied to setting up your micro-corporation.

Tod